Betting against London is tempting but no sure thing

There is far more to the British capital than hot money and hot air, writes Tim Harford

Shanghai’s Pudong district soared out of a swamp in a few short years; Dubai bloomed in a desert. London is too venerable for such sudden efflorescence, but the City is trying its best to sprout skyscrapers. The infrequent visitor cannot fail to be struck by the line of new buildings striding north from the Shard at London Bridge: the Walkie-Talkie, the Cheese-Grater, the Heron Tower, Broadgate Tower. The City’s first skyscraper, then the National Westminster Tower, was completed in 1980; it took a generation to add a second, the Gherkin. Now both are lost amid a fairground of new stunt architecture. There is more to come.

Meanwhile, the only thing Londoners themselves can discuss is the rapidly inflating price of the houses they have bought – or cannot afford to buy. The joke used to be that the typical London house was earning more than the typical London household. Today it is no longer a comic exaggeration.

To add to the air of insanity, there is talk of “lights-out London”. Rich foreigners are snapping up prime property for tens of millions of pounds, digging out multistorey basements that would shame Tolkien’s Mines of Moria, and then leaving them empty while they sail around in gigantic yachts.

It is all rather unnerving. So when Cory Doctorow, an author and blogger, recently posted the question, “How would you short London?” he seemed to be raising something vital. Shorting London property is not too hard – betting against the shares of Capital and Counties or Great Portland Estates should do the trick. (I have not yet figured out how to bet against luxury hair removal salons or overpriced steak houses.) But the deeper point is not how to short London but whether it has set such a hubristic course that nemesis is inevitable. There seems to be something feverish and surreal about London these days. The contrarian in me whispers that it will all end in tears. Will it?

It is worth teasing apart different parts of the madness. The idea of lights-out London can be dispelled by five minutes walking down Oxford Street, or a single attempt to make a tube journey between the hours of 8am and 9am. London is heaving: the shops are full, the pavements are spilling over, the streets are clogged with traffic and the public transport system is crammed. Some foreigners are buying second homes in central London but the numbers seem to be very low. Soho is in little danger of becoming a ghost town.

The skyscrapers are a separate facet of the London craze. One can quibble with the selfish, attention-grabbing architecture. Even if the Walkie-Talkie with its heat-focusing curved sides has stopped destroying nearby property, it is a bully of a building that will do London no favours.

Yet the scale of the building effort itself is less insane than it might seem. London is making up for lost time. New Yorkers would chuckle at the idea that the Heron Tower alone was plenty big enough for one decade’s worth of growth. The housing bubble looks more serious. One measure of that is the gross rental yield, which – reckons property search engine Home.co.uk – is below 3 per cent in the prime west London postcodes, and below 5 per cent in much of the rest of the capital. Those yields look like a recipe for trouble when interest rates rise – which they will.

But what do I know? I have been convinced that London’s housing is overvalued for at least a decade. The longer the boom continues, the more I doubt myself – even if the evidence of unsustainability just gets stronger.

Robert Shiller, one of this year’s Nobel memorial prizewinning economists, has long been my guide to bubble spotting. Perhaps in the hope of teasing fellow economists he has taken to treating a bubble as a condition best diagnosed with a psychiatrist’s checklist: “Sharp increases in the price of an asset like real estate or dotcom shares; great public excitement about said increases; an accompanying media frenzy …” Tick, tick, tick.

The most interesting question is the hardest to answer: is London’s innovative and cultural dynamo in danger of slowing down? Perhaps rich Russians and Saudis will live in Chelsea, their needs taken care of by armies of Poles commuting in from Bromley and Walthamstow, while French and American bankers will sleep four-hour nights in luxury flats in Canary Wharf and work flat-out the rest of the time. The entire mega-city, in this scenario, would contribute to the UK only in the way that an oilfield in the Thames Estuary would. The capital would be a plug-and-play, could-be-anywhere financial hub grafted on to a London experience theme park for visiting billionaires.

Perhaps. I am struck by how heavily this dystopian vision leans on the idea that foreigners are to blame – an idea that always seems to engender panic and shut down the critical faculties. “It’s foreign investment, buy-to-lets,” one estate agent recently told a worried Guardian columnist. But that does not mean Brits cannot live in London. They can – but often as tenants of a foreign landlord who may well have overpaid.

It is possible for a neighbourhood to become a victim of its own success. Low rents attract artists, new businesses, experimenters and risk-takers. The neighbourhood becomes cool; rents rise. Eventually only middle-aged, middle-class squares live there. (Or – gasp! – rich foreigners.) But it is hard to see this applying across an entire city. Some fret that Manhattan is becoming a bore. It still seems passably diverting to this tourist, and even if Manhattan is tedious, Brooklyn is picking up the slack. As in New York, so in London: if Shoreditch becomes too pricey for bearded hipsters making artisanal pickles, there’s always Bow or Clapton Pond.

London is too economically diverse and too socially cosmopolitan to turn into a high-rent economic desert. As Europe’s only English-speaking world city – apologies to Amsterdam, Birmingham, Dublin, Manchester and Glasgow – it is a magnet for English-learners and English-speakers from across the EU. It is a centre not only for finance and tourism but education, media, technology, food, design and the arts. It is a hub for the British and a gateway to Europe for the rest of the world. The housing bubble looks likely to burst. But there is more to London than hot money and hot air.

6 Comments

eric hirschberg says:

I think the way to look at the London housing premium from a rational economist’s perspective would be: the cost of exchange control insurance + the cost of refugee ( finding onesself stateless ) insurance.
This is evidenced by the buyers and the price they pay vs the political risk

You are correct of course, London is Europe’s only English-speaking world city, but that will change f accommodation is unaffordable.

If Scotland votes Yes in 2014, I would expect a burst of energy to fuel growth in Glasgow and Edinburgh. Also, Dublin will emerge from this recession wiser and stronger. London will abide, but its influence will wane, as right now, its economics don’t really like people very much.

I’m not sure I agree. Or if I do it’s not for entirely comforting reasons. Renting in London is ridiculous. 40-60% of your take home pay just to live somewhere relatively safe(r) is a big ask. People who want to save and buy will start avoiding London.

Its innovative and cosmopolitan side might remain due to those who are happy to spend what they earn and rent for the rest of their lives (which is sort of like saying London will do well for the same reason Wonga does which isn’t exactly a happy thought). London will eventually be made up of those without much monetary forethought or those with so much money they needn’t have any. Perhaps it’ll become some sort of carousel for optimistic but skint 20 somethings who eventually move away when they want to save for a house or start a family.

An interesting phenomenon I have noticed that seems to be growing more common is what I like to call ‘the hotel commute’. Because rent and housing is so expensive it makes sense to commute from afar. But now rail travel is so expensive it costs just as much to live out and commute in each day which means you have to go really far out. This has given rise to people living in places like Manchester (Grantham also seems popular) commuting in Monday morning, staying in a budget hotel during the week and then going back Friday night. They get the London salary but northern prices and it’s actually cheaper to stay in a hotel than it is to commute in each day or live in London!

An interesting phenomenon indeed, which I’ve also noticed. The reverse is also true. In my case, in order to pay the mortgage on a semi-detached house in south-east London, I work overseas all week in a job which pays far more than the equivalent (public sector) job would pay in London, so that I can commute back to the family home in London at the weekend.

Interesting how White Hall, Downing Street and the gov are conspicuously absent from all this even though London is above all an admin center and much of the other industries are plug-ons. The City after all grew on the exchange of public bonds and little else… If one thing was to bring down London, it’s a fall in public spending.